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Broadgate: Weekly Briefing

13 January 2012

China – China’s economy is being weighed down by slowing growth in the U.S. and the European Union (E.U.), but the possibility of a hard landing should be ruled out, said David Lipton, first deputy managing director of the International Monetary Fund (IMF).

“I don’t see China having a ‘hard landing’,” Lipton told Hong Kong’s Trade Development Council (TDC) in an interview ahead of the January 16-17 Asian Financial Forum.

“What we subscribe to is that China’s growth is moderating somewhat from a very rapid rate that they experienced last year,” he said.

China – China’s rate of inflation was little changed in December, despite government efforts to rein in prices.

Consumer prices rose 4.1percent from the same month last year, the National Bureau of Statistics said. That is down from 4.2percent in November. For the full year, inflation was at 5.4percent, well above government targets.

Analysts said that while inflation remains a concern for policymakers, price growth should slow further and more quickly in 2012.

Jain Chang, China economist at Barclays Capital, said that there was usually a lift in prices in the month before and after the Chinese New Year, which is due to start on 23 January.

However, she said that the expectation was for price growth to continue moderating throughout 2012.

India – India’s industrial production rebounded in November, easing concerns that monetary tightening was damaging growth.

Factory output grew 5.9percent in November from a year earlier, a sharp turnaround from a 4.7percent decline in October.

India’s central bank has raised its key interest rate 13 times in the past two years in an attempt to control rising consumer prices. There have been fears that the high cost of borrowing was hurting the manufacturing sector.

“I think the Reserve Bank of India (RBI) will take comfort from the industrial output number as it shows growth is shaky but not negative,” said Madan Sabnavis of CARE Ratings in Mumbai, “It also allows the central bank to continue to focus on inflation.”

Greece – Greece may need more money from European partners if not enough private creditors sign up for a voluntary swap of bonds to cut the country’s debt burden, its deputy finance minister said on Thursday.

“If the percentage of participation is not, for instance, 100percent, then Greece may need further support from the side of our partners to cover financial gap, Filippos Sachinidis said. The comments come ahead of talks on the bond swap in Athens on Thursday between Charles Dallara, the head of a group representing private-sector banks, and Greek government officials including the finance minister and the prime minister.

Italy – There is a “significant” chance that Italy will have its credit rating downgraded this month, an executive at the ratings agency Fitch has said. David Riley, Fitch’s head of global sovereign ratings, cited the lack of a plan to halt the eurozone crisis, coupled with Italy’s high debts.

Fitch warned last month that Italy and five other eurozone countries were all at risk of downgrade. Mr Riley said the agency’s reviews of the countries were due to be completed by 31 January.

He said that Italy, the third largest economy in the eurozone, was at the “front line” of Europe’s debt crisis.

Germany – The German economy grew by 3percent in 2011, broadly in line with expectations but less so than during 2010.

The Federal Statistics Office has released the preliminary figures on Thursday, demonstrating that while the economy grew faster than at its pre-crisis level, growth still fell short of the 3.7percent recorded for 2010.

Domestic consumption was one of a strongest contributors to growth, reports the Federal Statistics Office. Household consumption levels increased by 1.5percent, representing the highest growth rate in five years.

German exports rose by 8.2percent, year-on-year, while imports grew moderately slower at 7.2percent.

There are concerns that these latest figures are indicative of an economic slowdown in the fourth quarter, which could push Germany into recession.

Spotlight on: the reality of the European pension crisis

Even before the euro crisis, people were worried about Europe’s pension issue.

State-funded pension obligations in 19 of the E.U. nations were approximately five times higher than their combined gross debt, according to a study commissioned by the European Central Bank (ECB). The countries featured in the report compiled by the Research Centre for Generational Contracts at Freiburg University in Germany, in 2009, had almost EUR30tn (USD39.3tn) of projected obligations to their existing populations.

“This is a totally unsustainable situation that quite clearly has to be reversed,” Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said.

A recession threatening the world’s second-biggest economic bloc, along with efforts to reduce debt across Europe, is exacerbating the financial risks. Stable or falling birth rates, plus rising life expectancies, are adding to pressures, with the proportion of economic output devoted to spending on retirement benefits projected to rise by a quarter to 14percent by 2060, according to the ECB report.

Increased retirement ages and lower benefits must be part of any package to hold the 17-nation euro zone area together, according to analysts, including Fergal McGuinness, the Zurich- based head of Mercer’s McGuiness, the pensions consulting unit for central and eastern Europe.

Europe has the highest proportion of people aged over 60 of any region in the world, and that is forecast to rise to almost 35percent by 2050 from 22percent in 2009, according to a report from the United Nations (U.N.). That compares with a global estimate of 22percent by 2050, up from 11percent in 2009.

The number of people aged over 65 in the 34 countries in the Organization for Economic Cooperation and Development (OECD) is forecast to more than quadruple to 350 million in 2050 from 85 million in 1970.

In so-called developed countries, the average lifespan will reach almost 83 by 2050, up from about 75 in 2009, the U.N. said.

Governments and companies have taken steps to reduce future costs with policy makers having increased retirement ages in countries, including France, Germany, Greece, Italy and the U.K.

“Irrespective of whether you’re inside or outside the euro or anything else, raising retirement ages is one of the structural reforms that all of Europe has to do,” Kirkegaard said. “The crisis has forced them to address this. This is actually a positive thing in many ways.”

By 2060, the average French pension benefit will be 48percent of the national average wage, compared with 63percent now, said Stefan Moog, a researcher at Freiburg University.

Pension managers and governments are relying on economic growth to safeguard the promises they make. If the euro zone grows too slowly to bolster public and private funds, the retirement plans may become unaffordable, according to Mercer’s McGuinness.

“The amount of money countries are going to spend on social security and long-term care is going to go up,” McGuinness said. “Governments with more generous social security systems will have difficulty affording them. They will have to recognize these costs will impact their ability to reduce borrowings.”

State pension obligations in France and Germany are three times the size of their economies, according to data compiled by Mercer. It’s more sustainable in France than Germany because of France’s higher birth rate.

Last year, there were 4.2 people of working age for every pensioner in France. The ratio will fall to 1.9 by 2050, according to a report by Economist magazine in March. In Germany, the proportion will decline to 1.6 from 4.1 in the same period.

“That is going to put a lot of pressure on Germany’s ability to meet their promises,” McGuinness said. “What they are more likely to do is cut back benefits. Governments face a lot of longevity risks.”

The issues outlined above highlight how private pension planning (i.e. not relying on the state) is now all the more important. More now than ever, it is essential for your clients to consider making their own savings arrangements for retirement.

The flexibility that comes with arranging personal pension provision through an offshore investment bond also means that your clients retain control over where their money is invested and when they can access it.

The information set out herein has been obtained from various public sources and is sent to you by way of information only. Broadgate can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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